Advantages of Making Sales on Account

Advantage over companies that make cash sales: Customers prefer buying goods and services from organizations that offer to sell goods and services on credit as they get a chance of making payment on a later date. Customers will always tend to buy goods on credit so that their liquidity position is not disturbed. Cash sales in the case of huge purchases are not feasible.

Customer loyalty: Selling goods on credit to customers develops trust between the customer and the lending authority. When a company trusts them to pay the dues in the given period, it encourages a loyal business relationship. A loyal customer would ideally choose to make purchases from the same organization that lends them credit.

Disadvantages of Sales on Account
Negative effects on cash flow: The cash flow of an organization is affected adversely in case of delay in payment from customers. This could even create operational setbacks.

Obligation to fund accounts receivables: The organization would have to anticipate an increase in accounts receivables and find the means to fund them. They may have to borrow money from a bank or get their credit period extended from suppliers.

Credit risk involved with customers: Sales on accounts involves a lot of risk. Creditworthiness of each customer must be analyzed while selling goods on credit. This requires checking the customers’ credit references by the firm. The firm may even seek help from professional agencies to get the customer’s credit worthiness verified.

Creates bad debts: In sales on account, the seller can face risk of bad debts if the purchaser of the goods fails to pay the money due on those goods. In such a situation, the company will need to write off the overdue account as a bad debt.

Concepts Related to Sales on Account
Accounts Receivables: Accounts receivables are created to record the payment due from customers against the sales made by the organization. It is reported as a current asset in the balance sheet as per the accrual accounting system. Accounts receivable are laid down so that there is a smooth flow of working capital into a business.

Credit Period: The period between sales made and payment received is a credit period. This is a crucial element as the organization manages its operations as per this period.

Bad Debts: Sometimes, some accounts default payments which may ultimately not be recoverable. This is termed as a bad debt, which is charged to a profit or loss account.

Treatment of Sales on Account under Cash and Accrual Accounting
Cash Accounting: Cash basis of an accounting system is a method in which a transaction is not recorded until the cash is received by the company. In the case of credit sales, the revenue is recognized only after payment is received.

Accrual Accounting: The accrual basis of the accounting method records the sales at the time of the sale irrespective of the fact whether payment is received immediately or on some later date. This means that both sales on account and cash sales are recorded in their respective ledger accounts at the time of the sale.